Countrywide to offer refinancing on subprime loans

Move won't solve giant mortgage lender's problems, analysts say

AlistairBarr

NEW YORK (MarketWatch) -- Countrywide Financial, which became the biggest mortgage lender in the U.S. by offering borrowers a slew of novel, untested loan products, said Tuesday that it will help some of those same borrowers, who now face foreclosure, to refinance and keep their homes.

Countrywide
CFC, -4.49%
unveiled an initiative to refinance or modify up to $16 billion in loans for borrowers who are facing an adjustable-rate mortgage reset through the end of 2008.

The plan is targeted at subprime borrowers, those who have below-average credit scores and can't qualify for a regular, so-called prime mortgage. Those home buyers did qualify in recent years, however, because for years firms like Countrywide structured loans with low initial interest rates to make mortgages more affordable initially.

Rates on those adjustable-rate mortgages are now resetting higher, and hundreds of thousands of borrowers face payments beyond their means. See story on reset tsunami.

Loan modification plans can reduce the profitability of mortgage lenders, but the effect of Countrywide's new plan will likely be small compared to the other problems faced by the company, analysts at Fitch Ratings and Moody's Investors Service said on Tuesday.

"The non-conforming mortgage market is still not viable," Vincent Arscott, an analyst at Fitch, said in an interview on Tuesday. "For originators of non-confirming mortgages, there's really no secondary market to re-sell the loans. That's more of a concern."

Countrywide shares fell 4.3% to $15.01 on Tuesday. The stock fell to its lowest level in more than four years on Monday and has lost more than 60% of its value so far this year.

Countrywide's new plans involve modifying up to 82,000 mortgages worth $16 billion, the company said. That's less than 7% of the $245 billion in home loans originated by Countrywide during the first half of 2007, according to data from Inside Mortgage Finance.

"Because Countrywide is so big in this business, the headline number appears large, but considering the current environment, it's not a big deal," Arscott said.

The move will have no effect on the creditworthiness of Countrywide, but it could help some of the borrowers involved, said Craig Emrick, a vice president at Moody's Investors Service.

"It's certainly not going to have a substantial impact on Countrywide as an institution, but it could have a great impact of families struggling with mortgage payments," he explained.

Bigger challenge

The bigger challenge for Countrywide is how it will be able to adjust to a new environment in which subprime and other non-conforming mortgages are difficult to sell off in securitizations, Fitch's Arscott said.

"The fundamentals of this business have changed drastically and Countrywide has had to change too," Arscott said. "They used to offer a full range of products from A to Z, but now they only offer A, B and C. Their expertise and edge were in those D to Z products."

"There are a lot of other banks offering those A, B and C products at the same price, so their competitive advantage has diminished," he added.

Countrywide's third-quarter results, due on Friday, are "not going to be pretty," Arscott also noted.

The plan

Countrywide is creating a special refinance unit to contact 52,000 borrowers with $10 billion in loans and a strong payment history. The lender will offer borrowers options to refinance into prime loans or loans backed by the Federal Housing Administration.

For another 20,000 borrowers with $4 billion in loans, Countrywide said it will "supplement" its early notification process to find "affordable solutions."

For 10,000 more borrowers with $2.2 billion in loans who are currently delinquent and facing financial difficulties because of a recent reset, Countrywide said it's implemented a simplified loan modification process on pre-approved terms.

"Countrywide believes that none of our subprime borrowers that have demonstrated the ability to make payments should lose their home to foreclosure solely as a result of a rate reset," the firm's president David Sambol, said in a news release.

Countrywide will only modify mortgages if it thinks that this process will end up being cheaper than foreclosure, Fitch's Arscott said.

"They would only modify loans when it makes sense for them," he added. "They could lose money, but in the long run these modifications will likely be good for them and the borrower."

Loan modifications are on the rise because of the unprecedented number of adjustable-rate mortgages that are due to reset between now and the end of 2008. Still, a recent Moody's survey of mortgage-servicing firms found that the response so far probably won't be enough to prevent a big increase in foreclosures and losses.

The survey showed that most servicers had only modified roughly 1% of their serviced loans that experienced a reset in the months of January, April and July 2007.

"Moody's is concerned that the number of modifications that will be performed in the future by subprime servicers on loans facing reset may be lower than what will be needed to significantly mitigate losses in subprime pools backing rated securitizations," the rating agency concluded.

Under pressure

The mortgage industry is under pressure from lawmakers in Washington to help borrowers. Last week, Treasury Secretary Henry Paulson said there is an "immediate need" for more loan modifications.

Meanwhile, a top Democratic senator offered qualified praise for Countrywide's move on Tuesday.

"Countrywide's announcement to modify some loans is a welcome, if late, decision," said Sen. Christopher Dodd of Connecticut.

"Many more hardworking Americans are at risk of losing their homes unless subprime lenders quickly adopt and implement a set of standards and procedures for reaching out to them," said Dodd, who is seeking his party's nomination for the White House.

"Lenders have a responsibility to help qualified borrowers modify their mortgages so that they are affordable in the long-term," Dodd said.

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